Tuesday, August 27, 2013


With respect to the last post (the part about Amazon Web Services and IBM's chary response), I have joined an advisory group with a small start-up in the Valley -- one of those legions of start-ups for which the Valley is justly famous.  The name of the company is Zentera.  They are "out of stealth mode" which means that they have a fledgling website and some prototype software on trial in a few customer facilities.   It also means that at this point hardly anyone has heard of them.

Why do I bring this up, aside from an obvious personal desire to see them 'do well?'

The reason is that in a recent 'education session' with their execs, I learned more about the 'Cloud Computing Stack' than I'd ever known before.  Suffice here to say that it is sophisticated in terms of the issues that happen layer by layer in a 'presumed' five-layer stack.  I had to harken back to the early network days, and the seven-layer Prottocol Stack for an analogy.

The issue has to do with how an enterprise company can take advantage of "the Cloud" for Mission Critical or IP-sensitive requirements.  One simple example might illustrate the point: unless you can guarantee data security for every piece of data for anyone who might or might not be apropos to see/use it, you haven't provided enough security.  It is the difference between a guard checking you into a building, vs. having an escort to take you all through the building to get ONLY to the person you need or want to see.

Apparently, this is relatively easy to do in a hard-wired specific case, but incredibly hard to assure in a general case.  And many companies are wrestling with how to do this, more or less on a point-to-point basis.  Zentera has tackled it at the generic IT shop boundary layer, building a secure, guaranteed bridge between a cloud services provider and a specific set of requirements for a specific user.  And they claim to do it quickly, cheaply, effectively.  If so, it could be a game changer.

Reminds me of the days when the big arguments were Hubs vs. Routers.  Are you more focused on the network of your own computers, or on linking the network of your computers to other networks.  The answer then was BOTH, but each side developed independently for a surrprisingly long time., and for way too long, there were few referees.  

From the sound of excited IT directors who have experienced Zentera equipment, this solution just might have a similar evolution.  Stay tuned...

Great potpourri in the SJ Merc Biz section today

The juxtaposition of four stories today on the front page of the San Jose Mercury-News caught my eye.

1. Facebook is now a 'hot new darling' stock.  Well, it's about time.  Yesterday, for the first time, the stock price neared the number achieved mid-day on the IPO launch day.  FINALLY.  $100B valuation

2. Tesla achieved $20B stock valuation yesterday, its car outselling all but the Mercedes E and the BMW 5 series in the popular and hot California market for sports and luxury cars.

3. Coca-Cola's secret recipe is locked in a vault, with red strobe lights surrounding it

4. Amazon's Web Services division is being challenged in court by IBM.

On page 2 (actually B8 the dumb way the Merc has revamped its newspaper), another headline screams that "Microsoft commits to Ballmer's plan."

The next headline says, "China cracks down on daring microbloggers."

What is worth taking away from these scribbles?  Let's take them in turn:

1. Shares are up from $17.78 to $41.54, which the analyst called "up 55% for the year" but obviously a lot more than that from the low.  "Facebook shares are now trading at about 180 times earnings, higher than all but 3 companies in the S&P 500," said one analyst who then tried to explain that this was a good thing becuase it shows faith that the company will grow.  Even so, a critic pointed out that $100B valuation was less than Intel at $110B, Amazon at $180B, Google at $289B, and Apple's 450B.
Revenur for the quarter, up 53%, hit $1.81B, still small alongside Intel's $13B.  Ah, well. growth wins..

2. Tesla sold 10,500 cars in six months, and is completely manufacturing limited.  Its shares trade at 360x forecasted 2013 earnings; its valuation is more than Fiat International, and about 44% of General Motors which produces 10,000 cars each morning this year.

3. Coca-Cola and Kraft and Twinkies were held up as obvious trade secret brand winners.  HP???

4. Here's the sleeper.  Cloud services -- whatever they are -- are DOMINATED by Amazon Web Services.  You all know this, right?  Selling books and dishwashers and wine coolers over the web takes a special sort of security smarts, and Amazon is better at it than anyone else.  Okay, got that!
But wait -- the story is not about that.  It is that AWS has moved into data storage and computer-server time rental to companies., AND THAT IT JUST WON the CIA business away from IBM.

This is big news, or should be.  HP, CISCO, ORACLE -- pay attention.  IBM already IS paying attention.  AWS is credited in the article with having 5x more business in this space ($3B) than the next fourteen players combined, according to Gartner, "a research firm."

These stories always slay me a bit.  Journalists are journalists partially because they couldn't pass the math classes.  AWS has 83% of the total business.  It is $3.5B total, estimated.  And that leaves 17%, spread amongst all the other players.  And last I looked, 83 / 17 divides as 5/6ths and 1/6th.  So, technically, the guy is right.  All of the others have 17% or 1/6th of the business.  AWS has 5/6ths, which indeed is five times all the others.  So, the story is 'correct' -- it just is an odd way to say it.

The better way to say it, is that there is a nascent business here, which at first blush is being served by AWS, and IBM would like to do so.  The real business isn't what AWS (or IBM, HP, or Rangeware or any of the others do well yet) currently serve, but would like to do so.   That business is the SECURE CLOUD COMPUTING Stack for Enterprises.   And it is less than $1B today -- and will grow, trust me, by at least 100x, maybe 1000x, in the next decade.

It will be bigger than stories 1, 2, 3, and 5 in the Merc today, and possibly even #6.  It had the smallest story, but far and away the most significant.

Watch this space!

Sunday, August 25, 2013

TEDx talk re Innovation and Resilience

Resilience is not often talked about as a necessary ingredient for Innovation.  It is closely aligned with Perseverance, but has more of an Adaptive quality to it; it is also related to Thinking Out of the Box, but often it is what you have to do after the Out of the Box idea fails.

Anyway, I gave a TEDx talk about resilience in Livermore, CA a couple of months ago.  You might find it interesting...   let me know


Saturday, August 24, 2013

biting the hand that feeds you

We don't talk about it much in our industry, but one of the real issues on occasion is cannibalism.

Some folk talk about the Osborne Effect, wherein Adam Osborne produced the first viable 'luggable' (an early version of a portable computer) which sold very well for a year or so.  Integrated circuits were moving so rapidly that a "B" model was soon on the drawing board, and it greatly surpassed the power of the Osborne 1.

Meanwhile, competitors were starting to appear, and Osborne's sales lead was being challenged.  He elected to describe his new whiz bang at a conference, with plenty of press there, and the news spread like wildfire that the imminent Osborne 2 would be stupendous.

The result?  No more Osborne 1's were sold.  The inventory was unsellable, the expected cash flow evaporated, and Osborne Computer couldn't pay its bills.  It couldn't finish the design, or build any of the new machines.  Bankruptcy followed almost immediately.

This was pre-VCs, so maybe today it would have been a different ending -- who knows?  But the message is real.  You can invent something that crumbles yesterday's sales -- what we at HP always called "eating your own children".

It works best when your new thing kills a competitor's products, but when you're the king of the hill, odds are good that something relatively impactful for customers in a positive way -- smaller, faster, cheaper, lighter -- might just cost you sales of the older larger, slower, more expensive, heavier box.

Think about this with Donatelli's "Big Three" that he touted in the April 2013 interview.  Moonshot, essentially a tailored Blade server approach, is said to reduce costs 77%, while improving performance up to 80% for specific applications. Then Store Once, the radically powerful idea for storing "once" instead of multiple copies with HP Labs' great new software saves companies all sorts of disc space, server time, and human intervention.   Donatelli and HP call this "Data De-Duplication."

Sounds great unless ... it slows demand for HP servers and discs.  What if this is what is going on?

Actually, HP computers with these great little photo labs, Snapshot et al, are doing exactly the same thing to images.  Why print a whole set of copies for everyone who came to the party?  Just put 'em in Shutterfly or a DropBox, and they can be viewed by all without making any ink copies.  Whew, don't tell Boise divisions.

What do you do in such a situation?  Well, you surely don't want a small start-up to replace your stuff, so you have to do it.  But it could well create a situation where leading-edge contributions in one part of your business wreak havoc on other parts.  Might this be some of the story at HP?

The worse manifestation of this perhaps is the telephone rreplacing the telegraph.  Voice just was better than Morse Code.  Also digital photography is better, and 1000x more cost-effective per image, than Kodak emulsion film.  So the question isn't why didn't Kodak 'win' in the digital camera and film business since they invented 60% of all the replacement technology -- they couldn't win, because no one could win, in a game where previously expensive stuff is obsoleted.  Note that there isn't a Kodak slayer -- except Kodak.  No one will ever make the money on film images like Kodak did.  Period.  They didnt't do anything wrong except live too long.

HP comparisons 1Q 2012 thru 3Q 2013

So what really is going at HP that we might glean from "the numbers"?

The following two charts plot the revenue trends and the profit trends for the five major groups of the company (actually four major groups plus 'dinky' software).  The reason to include software (for which HP has historically been allergic, as I learned painfully for years trying to run SW divisions for them) is that the $1B software business, less than one fifth of any other business line, produces as many profit dollars as two of the 'big four'.  So, one wonders, WHAT IF THEY DID SW RIGHT?

First, the Revenue lines

Examining these lines is revealing.  PCS over seven quarters are "only" down 13.37%, a Compound Average Shrink Rate of 8.75% per year.  Printers, Enterprise Hardware, and Services all are vying for the next level, shrinking respectively 4.8, 4.5, and 5.4% annually.  Software has grown 2.5% per year.

So essentially for top line revenue growth, nothing has positive momentum.  Gag!  What the hell is wrong with innovation at this once-proud company?

The profit lines are shown in the next graph
Now, we can see some interesting things

In absolute terms, in six quarters PCs and ENT HW have lost $527Million in profit contribution while Printers, SW, and Services have added $231Million.   Who's gone from Meg's staff in the past two months?  PC and ENT HW VPs.  Bradley and Donatelli.  Is there correlation?

On the other hand, Shane Robison is gone too, the architect of the SW group.  But here the revenue line tells us something as well.  Software, with its healthy margins, has grown a mere $34Million on virtually a $1Billion base, or less than 3% per year -- no different than it was for years.  The secret here seemed to be to buy a SW company, have it turn out like Palm with WebOS or Autonomy with its flawed Business Analytics capability, and hope for the best.   In other words, strategically this line has been beyond disappointing, never mind the tactics.

The CAGR or CASR numbers here are bigger than their revenue equivalents.  Only PCs and Enterprise HW have CASR rates, at 31.2 and 14.4% per annum rates.  So a way to phrase the siuation for each of these two groups -- the groups that have just gotten new leadership -- is that for the past six quarters, they have been losing money three times faster than they are losing revenue.  On the other hand, two groups shrinking as fast as these in revenues actually have GROWN their profits, presumably by careful management (although every R and D person knows you can improve short-term results by canceling your future and not spending on R and D at the moment).  So, services and printers, whiole shrinking revenue by 5% per year, have grown profits by 21% and 13% per year respectively.  Similarly, software has grown profits by 15% per year, with only 2.5% revenue growth.

Puts a different slant on Donatelli's April interview when he defended low R and D expenditures, and said he was gratuitously grabbing HP Labs' contributions, doesn't it?

Stay tuned?

Some comparisons w competitors

The following graphs show HP's 3rd Q vs all the other company 2Q reports (offset by a month, right):

For the PC world, Intel is close to a Pure Play, as is Microsoft.

Apple derives only about 20% of its revenue from computing these days (depending what you call an iPad), so I am including only the laptop and desktop computing lines for them below

IBM of course 'bailed out' of PCs, so Lenovo is a pure play.

Dell is close to a Pure Play, almost all sales are in computing, but about 25% now are Enterprise level

So this chart is year-over-year gains or losses in percent for the PC portion of the companies shown.  Microsoft had the specific 'advantage' of a one-time 'new' Windows release in this quarter.

The next chart shows year-over-year comparisons of Other revenue and profits , which for IBM is all Enterprise, and for HP includes Enterprise and Printing, while Apple includes Music and Phones and Tablets.  So, note that HP had the largest revenue shrinkage, but held the profit margins the best

The next chart compares year-over-year profit changes for both categories for the most recent quarter.
Question -- is HP doing all that badly compared to these others?  Of course not.  Would you know it from the press coverage?  Nope.  Granted, the excitement yesterday about Steve Ballmer retiring from Microsoft drew some sharp critique, and yes, some folk cheered when Paul Otellini stepped down from CEO at Intel this spring, and yes, the folk who bought Apple stock at 700+ are mad at Tim Cook for not being Steve Jobs, but all in all, HP has done much better comparatively, according to these charts, than any of the reporters seem to acknowledge.

Look at this, wouldja.  HP is second-best of six, beating all but Apple in US high-tech companies?   Or at least high-tech companies in the computing arena.  

So maybe Meg, like John Young when Packard got sore, is doing much better than we think.   With reasoning like this, I decided that Carly (remember her?) atually outperformed most of her cohort CEOs in Silicon Valley during the dot.com meltdown.  She wasn't given much credit for that by oldtimer HPers, but it was true.  And other companies -- Sun, Oracle, Cisco, Intel, Microsoft -- kept their CEOs because the troops didn't have a historic 'voice' anyway.  So much for the HP Way....

Fun and games?


I have not met David Donatelli, so my observations are 'from a distance' compared with many others at HP whom I have known over the years.

His roots are EMC, not HP, and thus it was surprising when he was named several years ago to head the hardware Enterprise side.  It did well for a time, really starting to give IBM a run for its money in this back-office low-profie very high impact arena of which most stock observers are only dimly aware.

When Ann Livermore retired, Meg combined his successful Enterprise hardware group with her Enterprise services group (recall that Services was the combination of the EDS and HP consulting sides; each about 10% of HP, and together nearly a quarter of the company's revenue and profit).  The services side is also about 45% of the people.

It seemed like a natural -- he was uniquely well suited to merge the two, and the combination was almost half the corporation's revenue and profit.  So while PCs struggled, and printers and their ink are increasingly slowing down (not yet negative), this is where "everyone" at HP (Ray Lane and Meg notably) were putting their emphasis.

I bought it.  I still buy it.  The problem with the following interview is that it was four months ago, and the May and August earnings announcements got in the way.  But ... read the following interview and see if it doesn't sound impressive to you too:

HP’s Donatelli: Pulling Stuff Out of the Lab, into the World


A comparative look

It's fun sometimes to read these 'immediate expert' analyses that pop up within forty-five minutes of a quarterly announcement, and think about them in a little larger context.  The ones I particularly like are the headline writers, who seem to have an especially fun time with HP.

The gist of the HP story headlines on Thursday were: "HP misses forecasts, doom and gloom"   No comparison to Dell, Lenovo, Microsoft, Intel, IBM or Cisco, which might have given some context

The Merc story (printed) was great:  "HP Misses Forecasts, Earning in Line."  The forecasts were $27.3B, and 68 cents a share.  The results were $27.2B, and 68 cents a share.  So both for precision and accuracy, this was an amazing delivery.  Why the headline?   Compare that to IBM's headline last month when they had a 17% decline in earnings (HP's was 14%), and the NY Times said, "came in well ahead of forecast".

One pundit opined that Donatelli's demotion was "expected" while another bemoaned the move, saying he "was the bright face both internally and externally".    "Expected" in this case meant that the street had three hours advance notice, hardly enough for investors to digest and act.  And the "bright face?"  Google him vs. some others at HP -- not overly gracing the pages or the pulpit, we'd say.

Here's the story (ZD NET) mid-day Wednesday four hours before the earnings announcement:

Expect executive shakeup at HP amid Q3 earnings report

Summary: The game of musical chairs continues at the top leadership tier of Hewlett-Packard.

But over the week, the headline and the article I like best?

3 Reasons Not to Panic Over Hewlett-Packard's Earnings Report

Thursday, August 22, 2013

Let's actually look at the numbers

Revenue off 8%, year over year.  Down from $29.7B to $27.2B  Forecast was $27.3B

By group, PCs down 11%, with 3% operating margins (these will not improve).  This was mixed, in that Commercial sales were off 3%, and Consumer down 22%.

Printers were down 4%, still with 15.6% operating margins (still healthy, but somewhat at risk).  This was also mixed, with hardware sales up 12% for Commercial and up 2% for Consumer.  Ink sales were down 4% -- now here's the rub.  Do the math -- ink is 85% of the total revenue for this group.  Highly leveraged these days on supplies and supply replacement.  So, even though hardware sales 'look good' it is almost unimportant.  And unfortunately imaging is so good on computers these days, and with high-def TVs and monitors, and high-freq networks, it augurs poorly for lots more color print copies.

Enterprise was the big surprise, with a revenue decline of 9%, and a mere 3.3% operating profit.  This is now an amalgam of Hardware (e.g. Servers, Moonshot, etc) and Services (think the marriage of the old EDS and Ann Livermore's consulting group).  Each was down roughly 10%, and this is a shocker in the sense that this is where Meg has been putting the most "upside" emphasis, along with the Board

What's gone wrong here?  One answer is that the EDS team and the HP team for services have NEVER jelled.  The animosities and infighting are worse than the historic HP Ink vs Laser printing battles from the accounts I receive, and putting all of this under Donatelli only exacerbated the issue rather than led to palliatives.

Another answer is that Dell is newly aggressive in the server space, and that has cost HP.  A bigger potential issue is Cisco, enraged when HP went into Networking.  Cisco in networks has rebuffed HP successfully, almost as thoroughly as HP did to Dell in printing some years ago.  But strangely, Cisco has been successful reportedly in skimming some cream from the large enterprise server business, especially at HP rather than IBM expense.  Who would thought that possible?

So, whether Donatelli is a sacrificial lamb, or had real complicity in the Enterprise story is hard to say, but it is entirely safe to say that this is the troubled area hitherto absent from the discussion.  The signs have been clear for two quarters, maybe three, on the equipment side.  The services side just has not worked, period, for HP for a long time in terms of momentum or initiative.  IBM continues, in my opinion, to work this smartly, using intellectual consulting as the lead -- helping companies understand how to innovate, working on smart grids, consulting with governments, etc. on better practices for environmental and cultural issues as well as straight-forward business issues.  HP could have, but hasn't risen to this challenge.

Ah, so....

I agree with Meg's discouraging close -- 2014 will not be the recovery year, which two quarters ago was pretty optimistic.  But.... hope springs eternal.  let's hope a rabbit appears soon in the hat...

team dynamics

Arik Hesseldahl over at All Things D (who broke the story first, yesterday, hence others could say "Expected transition" even though it was expected for about three hours, not weeks as implied)  had an interesting take on the Meg staff changes:

The executive shake-up coming to Hewlett-Packard later today (yesterday, as I post this) yes just got more clear.
Dave Donatelli, executive vice president and head of HP’s $30 billion Enterprise Group, will be replaced by chief operating officer Bill Veghte, according to a report from Bloomberg NewsAllThingsD first reported on Donatelli’s reassignment earlier today.
Sources familiar with the matter said Veghte will not retain the COO title, and a replacement for that title will not be named. Veghte had been tapped as COO on May 30. He had previously been HP’s chief strategy officer, replacing Shane Robison, who is now CEO of Fusion-io.   
According to sources familiar with the situation, Veghte has been seen outside of HP as a logical No. 2 under Whitman, and this had rankled both Donatelli and Todd Bradley, an executive vice president and former head of the Printing and Personal Systems Group. Both Donatelli and Bradley have been seen at various times as contenders for the CEO position at HP. Bradley was reassigned earlier this year.
Sources said that Donatelli and Bradley have had a difficult relationship with Whitman in recent months, made worse by the fact that HP has been losing market share in servers to Dell, and lost its No. 1 spot in personal computers to Lenovo. Veghte’s elevation only soured the working relationship further.  This tracks the 'word' I've gotten from HP folk all year; Bradley is apparently considered a Hurd clone, including the lack of ethics as well as brutal interpersonal 'skills'; Donatelli is seen as merely floundering.  It will be fascinating to see what the 'locker room chatter' is about this latest move.  
The other move that will be announced today is the position of chief marketing officer. In that role, Marty Homlish will be reassigned, and will be replaced by chief communications officer Henry Gomez. Sources said the two positions will be combined under Gomez. Long a key aide to Whitman, Gomez served as vice president for corporate communications at eBay, and headed up communications during Whitman’s run for governor of California. Before eBay, he was vice president of corporate affairs at HBO.

Wednesday, August 21, 2013

Pundits weigh in, again

I've posted to this twice, but for some reason, it's deleted itself automatically both times.  Must be a great eraser from the News Services which I was trying to 'forward'.

Trying again, re headlines:

HP shares slide after quarterly profit falls short

SAN FRANCISCO — Tech bellwether Hewlett-Packard's long comeback trail took a detour Wednesday when it delivered financial results that fell short of expectations.  (Emphasis added:   Lessee now; expectations were pre-announced at $27.3B, and 68 cents a share.  Actuals were $27.2B, and 68 cents a share.  "FALLS SHORT?")


Bloomberg Business Week:

HP’s Slumping Businesses Signal Long Road for Turnaround By Aaron Ricadela - Aug 22, 2013 1:28 PM PT


Hewlett-Packard under fire after earnings report

POSTED:   08/22/2013 05:17:01 PM PDT 

Hewlett-Packard (HPQ) Rumor Mill Back in Business

Street Insider.com
August 23, 2013 3:12 PM EDT


The Incredible Shrinking Company

Seeking Alpha, Felix Salmon

where does the time go -- new earnings report

Hewlett-Packard hits earnings target, raises outlook

Published: Wednesday, 21 Aug 2013 | 4:06 PM ET

Hewlett-Packard hit its earnings target but reported an 8-percent drop in revenue as PC sales continued to slide. However, the computer hardware and software maker raised its outlook.
The computer and IT company's shares dropped 3 percent after the closing bell, following the news. 
HP also announced a few management changes, as expected: The company is combining its marketing and communications organizations under the leadership of Chief Communications Officer Henry Gomez. Chief Operating Officer Bill Veghte will become executive vice president and general manager of the HP Enterprise Group. Former Enterprise Group head Dave Donatelli will take on a new role focused on identifying early-stage technologies.  Was this entirely expected?
Earnings excluding items decreased to 86 cents per share from $1.00 a share in the year-earlier period 
Revenue eased 8 percent to $27.23 billion from $29.67 billion a year ago.
Analysts had expected the company to report earnings excluding items of 86 cents a share on $27.29 billion in revenue, according to a consensus estimate from Thomson Reuters.
HP raised its outlook: It now expects adjusted EPS for the year of $3.53 to $3.57. It had previously expected adjusted EPS of $3.50 to $3.60.
The company forecast net EPS of $2.67 to $2.71, versus a prior range of $2.50 to $2.60.
The declining PC market has been one problem for HP, but the company has also had trouble getting the traction in the storage and networking businesses that some of its competitors have. PC shipments were down 11 percent for the fifth straight drop in the previous quarter.